The too big to fail subsidy debate Is over

Or so says Simon Johnson at The Baseline Scenario blog. Johnson writes,

No doubt there is still a lot of shouting to come, but this week a team at the International Monetary Fund completely nailed the issue of whether large global banks receive an implicit subsidy courtesy of the American government. Is there a subsidy, is it large, and how much damage could it end up causing to the broader economy?

The answers, in order, are: yes, there is an implicit subsidy that lowers the funding costs for very large banks; the subsidy is big, with costs of borrowing for these banks lowered by as much as 100 basis points, i.e., 1 percentage point; and yet this large scale of implicit support is small relative to the macroeconomic damage that is likely to be caused by the high leverage and incautious risk-taking that the subsidy encourages.

That subsidising banks, implicitly or explicitly, is dumb and likely to lead to big trouble is something of a no brainer but its good to see that the IMF is willing to come out and say so. This is a step in the right direction. Now for the big question, What to do about it? Answers on the back of a postcard should be sent to just about any world leader you can name.